We haven’t looked at Japan in a while.
In the few weeks we’ve taken our eyes of it, they’ve gone and called a snap election.
Clearly, incumbent prime minister Shinzo Abe has decided that he’s no Theresa May.
Will the populist option surprise everyone yet again? And what would it mean for investors if it does?
Japan’s Emmanuel Macron
Later this month, on 22 October, Japan is holding a general election. You might be thinking “what, again?” and you’d be right.
Current prime minister Shinzo Abe has been pretty successful as Japanese prime ministers go. He’s the third-longest serving since World War II ended. He was briefly prime minister in 2006 before resigning for health reason in 2007.
He then stood again in 2012, effectively winning on a platform of defibrillating the Japanese economy with never-before-seen levels of money printing. ‘Abenomics’ has other aspects to it, some of them more significant than others, but monetary looseness on an epic scale has been the main one so far.
In 2014, he called a snap general election, which he sold as a referendum on Abenomics. He won.
Now, he’s decided to roll the dice again. At the end of last month, Abe called another snap election. This time it’s a referendum on his plans for social security spending – he plans to take money from a planned hike in VAT in 2019 and spend it on help with childcare and education – and his handling of North Korea. In reality, it’s probably more about securing backing for his desire to change Japan’s pacifist constitution.
You would think that given the current febrile global political backdrop, a wise (or at least cautious) incumbent politician might by now have realised that calling a snap election is quite a foolhardy thing to do.
Voters do insist on doing the oddest things. That’s now putting ideas into the heads of every political go-getter who ever dreamed of one day sitting on their particular nation’s Iron Throne, but hadn’t quite thought they could out-manoeuvre the existing political apparatus.
And Japan, it seems, is no exception.
Yuriko Koike, the current governor of Tokyo, is the populist candidate in this scenario. She’s pulled an Emmanuel Macron – setting up an entirely new party in the hope of overturning the status quo.
On the one hand, she’s made a start – the launch of her new “Party of Hope” has completely wiped out the Japanese opposition, the Democrats (LDP), who have now freed their candidates to work with her. But that’s put Koike in a tricky quandary.
You see, she has yet to decide whether to run. In fact, she has said that she definitely won’t. Understanding politicians as we do, we can’t take a 100% denial as proof of actual intent. She to be clear, she has to make this decision by this Monday coming (10 October).
The difficulty for Koike is that if she wants to run for parliament, she has to stop being governor of Tokyo, even though she was only elected to the role a year ago.
That means she could end up abandoning a powerful post, and risk looking like something of an unreliable dilettante. (I can’t think of any other former big city mayor with that sort of reputation, can you?)
And her prize for taking all that reputational and career risk could be nothing more than the opportunity to spend the next few years as leader of the Japanese opposition. Not fun for an ambitious politician.
Of course, if she doesn’t stand, it looks as though she eviscerated any genuine opposition to Abe all for the sake of a vainglorious ego trip. On balance, that seems a more acceptable risk. It gives her enough time to build a reputation for competence and a brand identity for her party, ahead of a shot at the big job when the next election rolls around.
It doesn’t matter who wins the election
Anyway, for investors it probably makes no real difference either way.
The Japanese economy is doing well. Like most other developed economies (outside the eurozone periphery), unemployment is at multi-decade lows. Inflation is still barely there, but it is picking up slowly. Corporate confidence is solid across the board.
As Capital Economics notes, the latest Tankan business survey shows that “capacity and staff shortages are the most pronounced since the early 1990s and the survey suggests that price pressures are strengthening”.
As the FT points out, even if Koike does stand and win, she’s not likely to change that. She and Abe might disagree on details (she would delay the rise in VAT), but otherwise they’re not desperately different. They’re both right-of-centre (for Japan).
And it seems unlikely that they would mess around with the central bank formula that has served them so well in the last five years or so.
In short, North Korea and its leader’s pronouncements are probably the biggest outstanding short-term danger to the Japanese market right now. In the medium term, the risk is that overvalued US stocks take a tumble, and that has a knock-on effect to global markets (which it would).
But in the long run, Japan still looks like a good place to have your money. It’s emerging from a near-30-year fallow period and it’ll be interesting to see how the markets react when and if inflation finally starts to get some traction.